Retirement might seem far off, but Americans, especially younger Americans, are woefully underprepared. The pandemic and two economic crises in recent history have made it difficult for U.S. workers to save the amount they need to every year in order to maintain their lifestyles in their golden years. But it’s never too late to start or restart saving. There are two ways individuals can save for retirement: pre-tax contributions into a traditional retirement account or HSA, and post-tax contributions into a Roth retirement account. The type of retirement account they choose will affect the taxes they pay in the year they’re contributing their money and how those distributions are treated (and taxed) in retirement.
This guide can not only help individuals maximize their retirement savings (and hopefully bridge that retirement gap) but can help employers and brokers put the right benefits in place so that their employees can save more successfully and hopefully feel less stress as a result. We’ll discuss the two most common types of retirement plans: 401(k)s and IRAs (including their Roth counterparts), as well as Health Savings Accounts and how they are a powerful benefit to help augment other retirement savings plan(s).
What is a Pre-Tax Retirement Plan?
A pre-tax retirement plan is a retirement savings account where contributions are deducted from the individual’s income taxes. The two most common types of pre-tax traditional retirement accounts are the 401(k) and the Individual Retirement Account (IRA). The 401(k) is an employer-sponsored retirement savings plan and an IRA is a retirement savings vehicle that workers can contribute to whether or not their employer’s offer this type of plan. Contributions to a 401(k) and traditional IRA are tax-free in the year they’re made and distributions are taxed at the appropriate income tax rate in retirement.
Once the 401(k) and traditional IRA account holders reach age 73 the IRS requires they start withdrawing from their retirement account. These withdrawals are called “required minimum distributions” (RMDs) and the exact amount of the RMD is based on the account balance and the account holder’s life expectancy.
Unique features of a 401(k)
Here are the features of the 401(k) that differentiate it from other types of retirement accounts.
A 401(k) can only be accessed through a sponsoring employer, but can move with you throughout your lifetime through balance transfers.
In order to contribute to a 401(k), an individual must be a W2 employee and work enough hours to qualify for the plan under their employer’s policies (typically 30 hours a week or more).
Both individuals and their employers can contribute to the account. Employers’ contributions to employees’ 401(k)s do not count towards employees’ annual contribution limits.
The IRS sets the contribution limits for 401(k)s each year, adjusted for inflation. In 2024 the annual contribution limit for the 401(k) is $23,000 if the account holder is under 50 years of age. If the account holder turns 50 or older in 2024, they can contribute an additional $7,500 to their account.
The money employers contribute to employees’ accounts could be subject to a vesting schedule. A common vesting schedule is four years. That means every year, employees earn an additional 25% of their employer’s contributions to their 401(k) and associated earnings. So if an employee leaves the company after 3 years, they will leave with 75% of the contributions their employer made and their associated earnings. Account holders always own 100% of the contributions they make to their 401(k).
They are subject to ERISA rules and regulations and come with complex annual testing and reporting requirements for employers.
They are owned and controlled by the employer and once an employee leaves the company, they lose the ability to continue contributing to the account. Their options are: Leave their money where it is and start a new retirement savings account at their next employer (if that employer offers one); Roll their 401(k) into a new plan at their new employer; Roll their 401(k) balance to a traditional IRA; Cash out their account and pay income taxes on the amount plus a 10% tax penalty.
Depending on the 401(k) plan, some plans come with high management fees that can eat into employees savings over time. It’s important for account holders to understand the fees associated with their accounts, especially when they leave an employer.
Unique features of an IRA
Individual Retirement Accounts (IRAs) have several features that differentiate it from other types of retirement accounts:
Individuals can access an IRA through a sponsoring employer or open an account through a financial institution like a bank.
Anyone who earns taxable income in the year they are contributing to their account can save money in an IRA.
Only individuals can contribute to an IRA, not employers, unless it is a SIMPLE IRA plan.
The IRS also sets annual contribution limits for IRAs, which in 2024 will be $7,000 if the account holder is under the age of 50. If the account holder turns 50 or older in 2024, they can contribute an additional $1,000 to their account.
IRAs are owned by the individual and not the employer, so if the individual leaves their employer, they retain access to the account and can continue contributing.
What is a post-tax retirement plan?
A post tax retirement account is a retirement savings account where contributions are not deducted from the account holder’s income taxes. The two most common types of post tax retirement accounts are the Roth IRA and the Roth 401(k). An easy way to identify a post-tax retirement savings vehicle is when it contains the word, “Roth” in the name.
Contributions to a Roth IRA and Roth 401k are made after taxes, but distributions are not taxed in retirement. In addition, these accounts do not have a required minimum distribution (RMD) requirement from the IRS so individuals can keep their money in their accounts for as long as they like. The Roth 401k has the same unique features as the traditional 401k, but Roth IRAs have some eligibility rules that differentiate it from all other types of retirement accounts.
Unique features of a Roth IRA
The primary feature that differentiates the Roth IRA from other retirement accounts is its income-based eligibility requirement called a “phase-out requirement”. In order to contribute to a Roth IRA in 2024:
An individual, who files taxes as an individual, must have earned less than $144,000 in 2022 and $153,000 in 2023.
A married couple that files taxes as a married couple filing jointly, must have collectively earned less than $214,000 in 2022 and $228,000 in 2023.
HSAs and Retirement
Health Savings Accounts can be paired with either traditional retirement vehicles that employers offer and enable account holders to maximize their retirement and tax savings. Contributions to HSAs are tax-free in the year they’re made. If employees use the money to pay for qualified medical expenses in retirement, the distributions are tax-free as well. Any other expenses in retirement are subject to the appropriate income tax. The balance in HSAs never expires and can also be invested and grows tax-free.
Here are the HSA basics.
Unique features of an HSA
Here are the features of the HSA that differentiate it from other types of retirement accounts:
To be eligible to contribute to an HSA, an individual must be actively enrolled in a High Deductible Health Plan (HDHP) and not enrolled in a Flexible Spending Account, unless it is a Limited Purpose or Dependent Care FSA. They also must not be enrolled in Medicare or be able to be claimed as a dependent on someone else’s taxes. Learn more about HSA requirements.
Anyone can contribute to an HSA (the account holder, a family member, the employer, a friend, etc.). But all contributions to the account count towards the annual limit.
The IRS sets annual contribution limits for HSAs, which differ for individual and family plans. Individuals that will turn 55 or older in 2024, and families in which the account holder will turn 55 or older in 2024, can contribute an additional $1,000 "catch up contribution" to their account.
Contributions to HSAs can be invested in the market and grow tax-free (as long as their HSA provider supports investing).
The account holder owns their HSA and thus retains access to it (and all its contributions) regardless of whether or not they are still employed at the sponsoring company.
As long as they are actively enrolled in an HDHP, individuals can access an HSA through their employer (if their employer offers one) or through a financial institution or HSA company in the private market.
If the account holder is no longer covered by an HDHP, they can’t contribute to their account but they can still use their previously made contributions and associated earnings on qualified medical expenses.
Here’s how using an HSA to augment the retirement savings plan already in place can benefit both employees and employers.
For Individuals
HSAs help participants to save tax-free money for qualified medical expenses now and in retirement. They have a triple tax advantage so account holders lower their tax base the year they make their contributions and when they use their savings to pay for qualified medical expenses in retirement.
HSAs are a powerful augmentation to the traditional retirement accounts since contributions can be invested and saved over the long-term.
Contributing to an HSA can benefit the individual because it can:
Lower your tax base in the years you make contributions.
Build a nest egg for medical expenses in retirement. Since the average couple retiring can expect to spend $315,000 on medical expenses in retirement (as of 2023), HSAs can offer a large cost savings in terms of taxes.
Give you flexibility to pay for the medical expenses that you value with tax-free money.
Save on health insurance premiums because HDHPs typically have the lowest annual premiums of the traditional health insurance plans. The rate of your premium depends on your plan and health needs.
Give you an additional retirement savings vehicle that offers a triple-tax advantage, including tax-free contributions, tax-free growth, and tax-free distributions for medical expenses. This can be helpful if you're close to maxing out your annual contributions to your traditional retirement account, as an HSA gives you the ability to invest your money to increase your retirement nest egg.
Is an HSA right for me?
Since your eligibility to contribute to an HSA hinges on your co-enrollment in an High Deductible Health Plan (HDHP), the real question is: is an HDHP right for me? The answer to that is: it depends on your medical needs and financial picture. Here are the HDHP specifics and how they could affect your financial picture:
In 2024, to qualify as an HSA-eligible HDHP, the health plan must have a deductible of at least $1,600 for self-only coverage and $3,200 for family coverage. The out-of-pocket maximum can’t exceed $8,050 for individuals and $16,100 for family coverage. For 2025, the health plan much have a minimum deductible of $1,650 for individual and $3,300 for family coverage. The out-of-pocket maximum in 2025 can't exceed $8,300 for individuals or $16,600 for families.
HDHPs typically have the lowest of the monthly premiums, so you will likely be able to save money monthly to put toward your deductible.
ACA-required preventive care is covered at 100% prior to the deductible being met.
So if you don’t use the medical system that often other than for preventive care, and/or you have the financial means to pay out-of-pocket for your medical expenses until your deductible has been reached, an HDHP/HSA arrangement could be beneficial for you.
Something to consider is: does my employer offer an HDHP/HSA arrangement? If not, does your employer sponsor at least a portion of the health insurance plan(s) they do offer? If your employer partially or wholly subsidizes the cost of its offered health plans, and it doesn’t offer an HDHP, you will have to compare the cost to you of not participating in your employer’s plan and purchasing an HDHP in the private market.
How I can use my existing HSA for retirement?
The best way to use your HSA for retirement is to contribute more to your HSA than you need for your current medical expenses. You can do this in two ways:
Pay for your out-of-pocket medical expenses from your checking or savings account, leaving your HSA contributions to grow in place.
Contribute more to your account than you need to use, up to the annual contribution limit and then consider investing the extra amount, as HSA investments grow tax-free.
If you’re trying to decide how to allocate your retirement contributions between your accounts, here are some strategies to use when deciding how to prioritize where you put your money.
Prioritize employer matching. An employer contribution match might be available for your 401(k) and/or your HSA contributions. If your employer does offer matching, it’s likely up to a certain amount. For example, your employer might match your 401(k) contributions, dollar-for-dollar, up to 3% of your salary. Or your employer might match 50% of your HSA contributions up to $500. So if it makes sense with your budget, it could be helpful to make sure you’re contributing enough to each account to capture 100% of your employer match. This can help ensure you build your savings at a faster rate than you without maximizing your employer match. Then you build your contributions from there. Just be mindful of the IRS annual contribution limits.
Prioritize tax savings. Since HSAs offer additional tax savings in retirement, you can think about maxing out your HSA contributions first, then distributing the rest of your planned retirement savings to your other accounts.
Prioritize portability. If you are like the typical millennial employee and move employers the average 2.75 years, or you work for yourself or anticipate working for yourself in the near future, you might want to prioritize portability of your retirement savings. This way you retain access to your accounts. Portable retirement accounts are IRAs and HSAs, while 401(k)s have strict eligibility rules and lack portability between employers and employment situations.
Prioritize paying upfront for medical expenses and reimbursing yourself in retirement. Medical expenses can be HSA-eligible as long as you were covered by an HSA-eligible health plan and had an HSA account at the time they were incurred. If you pay upfront and save your receipts, you can reimburse yourself in retirement for these expenses and invest your balance or allow it to earn interest in the present.
For Employers
Offering an HSA to employees can benefit employers on multiple fronts. It can help employers save money, support employees’ financial well being and physical health, and improve workforce productivity.
The benefits of offering an HSA
Employers can save money on health insurance costs. The corresponding HDHP allows employers to save on health insurance expenses, thus lowering the cost to employ workers. By offering an HSA alongside the HDHP, employers are giving employees a tax-free way to pay for the higher deductible, and this can serve as a powerful incentive for employees to sign up for the plan.
Employers save money on FICA and FUTA taxes. All contributions employees make are taken out prior to income tax assessment, which means it lowers their taxable income (which means it lowers employers’ payroll tax responsibility).
Employers give employees the opportunity to save more money, which increases their financial health. You might think that people would save the same amount per year regardless of how many savings vehicles they have. But the data shows that employees who are eligible to contribute to HSAs and 401(k)s save more in total than employees who have just one of these accounts. This could be because while the 401(k) distributions are taxed no matter what they’re spent on, HSAs have a specific benefit: tax-free distributions on medical expenses.
Employees are more likely to be physically healthy. Since they have a tax-free way to pay for qualified medical expenses, they’re more likely to receive the care they need.
Increased financial health and physical health, can lead to more productive employees.
Funding strategies: Should I match contributions?
Whether or not it makes sense as an employer to match employees’ HSA contributions will largely depend on the employer’s budget and how they prioritize their spend. Here are some benefits to matching employees’ contributions:
Save money. Employers can write-off employee contribution matches as a business expense.
Provide an incentive to employees to sign up for an HDHP (which can help employers save money on their health insurance costs) as well as contribute to their HSA accounts.
Help to improve employees’ financial and physical health which can improve productivity.
Stay competitive. According to SHRM, 63% of employers contribute to their employees’ accounts.
How to let my employees know about using HSAs for retirement
One of the best ways to educate your employees about using their HSA as a way to augment their retirement is to include information about their HSA works with other retirement-related material. You can ask your benefits broker and your HSA administrator for any educational collateral they have already created or you can create your own.
By including the HSA as part of your employee education around their retirement savings options, you can help employees to think about their HSA contributions as not just something to be used for today, but as something to be saved for tomorrow.
For Brokers
According to BenefitsPro, more than 50% of private sector employees were enrolled in an HDHP in 2022. And that percentage has risen for the 8th straight year. This data, combined with the fact that 64% of surveyed employees told Gallup they wanted a significant increase in benefits or pay in their next job, highlights the importance of offering an HDHP as part of compiling an attractive benefits package for employers.
How to educate employers
It’s not enough just to include an HDHP/HSA pairing as part of your suggested benefits offering to employers. It’s also helpful to show how this specific benefit can help employers save money on health insurance spend and employee turnover, as well as improve employee productivity.
The first step to educating employers is assessing their concerns. Here are some of the challenges facing employers and how to position an HSA as a possible solution:
Containing healthcare costs. HDHPs typically have the lowest annual premiums of the health insurance plans, and providing an HSA can help incentivize employees to choose the more cost-effective option.
Providing attractive benefits. HDHPs and HSAs have increased in popularity for eight straight years. The more employees understand how to use these accounts to benefit their present and future financial health, the more popular they are likely to become.
Employee adoption of benefits. If employers are concerned about employees adopting (and thus realizing the value of the offered benefits), you could offer to provide the employer educational material to distribute to employees, as well as host informational meetings and presentations where you explain how valuable an HSA can be.
The benefits of using an HSA
Explain to employers the benefits that an HSA offers to both their people and their company, including:
It’s a popular benefit among employees. Offering it can help employers improve turnover rates and recruitment efforts.
It can help employers save money on health insurance premiums, FICA and FUTA taxes, turnover and lost productivity.
It can help improve employees’ financial and physical health.
For Financial Advisors
Financial advisors are tasked with helping their clients to build a secure financial future and an HSA can be a powerful tool to reaching that end.
How HSA can be a tool for retirement savings
While 401(k)s, IRAs, and Roth 401(k)s and IRAs have strict eligibility and contribution rules that can affect how a client can utilize these accounts on an annual basis, HSAs are fairly simple and can be paired with any other type of retirement plan without conflict. Helping a client plan how to prioritize their contributions will depend on their financial picture and needs, but here are some ways an HSA can be used to augment their current retirement plan:
As a way to maximize tax savings in the current year. If your client is or will max out their pre-tax retirement contributions, an HSA can provide an additional vehicle to lower their taxable income while saving for the future.
As a way to diversify their portfolio. Since HSAs can be invested in a variety of assets (depending on the HSA administrator), this type of account can be used to further diversify their holdings.
As a way to lower their tax base in retirement. Since distributions for medical expenses are tax-free in retirement, and since the average couple retiring today can expect to pay $315,000 for medical expenses in retirement, having a pool of money from which to draw from tax-free, can help your clients retain more of their savings.
Rules for matching and contributions
Anyone can contribute to your client’s HSA, but all contributions, including their employer’s, count toward their annual limit. But once the contribution to their account is made, the client gets to keep 100% of it. Only employee or employer contributions made through salary reduction are pre-tax. If made outside of salary reduction, the account owner can claim them as a tax-deduction.
The account holder always retains access to their money, regardless of whether or not they are still employed at the sponsoring employer, or whether or not they’re covered by an HDHP. But they must be covered by an HDHP (and it must be their only health insurance) in order to contribute to their account.
The benefits of using an HSA
There are many benefits to your clients of using an HSA:
Helps clients save more money, tax-free for qualified medical expenses today and in retirement.
Contributions are tax-free the year they’re made, they grow tax-free through interest and investing and distributions for qualified medical expenses are tax-free as well (i.e. there’s a triple tax advantage).
Can help diversify their portfolio.
Can help lower their tax base in the present year and in retirement.
How to get started
Lively’s HSA is best-in-class in usability, design, investment options and customer support. Our engagement levels are consistently above industry average and our customers and account holders alike repeatedly report high satisfaction numbers. If you’re looking to uplevel your benefits package, reach out to Lively today.